dundas666 wrote:I just wanted to confirm my understanding of a number of posts where I've seen posters mention that Total Return is a more valuable portfolio selection criteria for drawing income than High Yield.
Using a simplified example, is the general idea that instead of a high yield IT portfolio that returns, say, a 5% income plus 2% capital growth, you would invest in a portfolio of growth-based ITs with 0% yield but grew at 9% so you could sell 5% each year and have 4% 'profit' instead of 2%?
Thanks in advance for your comments!
That might be one reason yes. Why would anyone prefer a portfolio that has a 5% return when a 9% return (that you can easily, and without cost, convert parts of it to cash/income) is available as an alternative?
Now obviously, especially in advance, you won't know which are 9% returns, and which are 5% returns. Nor will that cash/income conversion be absolutely easy, and costless.
Importantly also the "total universe" of selections is bigger than those that meet the niche description of high income. So by fishing solely in that niche pool you are limiting your selection options. At the extreme imagine all shares are high return, make large profits, likely to grow, and those profits are turned into cash at the company level. All except one that is. That one is not profitable, doesn't generate cash, and is shrinking. None pay dividends, except for one. You can guess which one.
An income portfolio, as often described, would consist of a single selection in a likely disappearing company, and the sole criteria for its selection is the result of a few (usually) men taking a few minutes twice a year around a Board table to declare an uncovered dividend.
Now that's clearly an exaggerated scenario (for effect) but who wouldn't prefer a diversified portfolio from the large variety of others, over the "risky" single share alternative?
Even in the real world, and perhaps the "rules" of a particularly favoured strategy on this site, that High Yield rules based system, limits your niche to large UK High Yield stocks, so maybe 30-40 qualifying companies, from a multiiple 1,000s of globally listed company alternatives.
"Total Return" is a broad church description and may mean different things to different people. With that in mind I would suggest "Income" and "Yield" can have multiple meanings too. If I wanted to adopt an "Income" strategy it would be the Income generated by the company (either Profit, or Cash return), or "yield" on company capital I would look towards. I would ignore the "dividend" income, or "dividend" yield, as its corelation to the underlying success of the company is far from perfect, and determined infrequently by just a few people whose agenda wouldn't align with mine. That suggests a likely potential for disappointment to me. It is much harder to "fake" the real, constant, aggregated, daily returns made by a company as a result of the entire workforce.